Loading in 2 Seconds...
Loading in 2 Seconds...
Pursuing or Defending Claims under FIDIC Contracts – Regionally & Internationally By Khalil T. Hasan Construction Solutions ( www.cspk.org ).
Pursuing or Defending Claims under FIDIC Contracts – Regionally & Internationally
Khalil T. Hasan
Construction Solutions (www.cspk.org)
Almost all construction projects, whatever the size, go through changes which result in additional costs and/or an increased time of the contract. Some examples are;
Majority of construction projects worldwide are administered by the FIDIC forms of contract.
All Clause references in this presentation, hereinafter, are in respect of, unless otherwise noted, the FIDIC Red Book 1999 Edition.
Some additional FIDIC provisions which provide entitlements to the contractor to claim for additional costs, either;
As a general rule, most of the provisions which entitle the contractor to an Extension of Time (EOT) also provide entitlement to additional costs (such as Prolongation Costs).
Notwithstanding the basis of entitlement, FIDIC stipulates (in Sub-Clause 20.1) a procedure for claims and related notices, which must be followed by contractors.
If the contractor does not comply with the stipulated procedures, a contractor\'s legitimate claim may be rendered invalid and rejected due to lack of procedural compliance.
Details in respect of such matters have already been discussed by other colleagues and panelists and therefore these will not be repeated.
Irrespective of the cause of action or basis of entitlement, a contractor\'s claim request must clearly identify what actions or inactions by the Employer (or his agents, including the Engineer) caused the compensable or delay liability and which of the entitlements bear a direct relationship to the financial loss or a schedule impact.
This establishes the all-important cause-effect link that is necessary to support a construction claim.
FIDIC forms typically specify contract clauses for variations, extension of time, order-of-precedence for contract documents, coordination, weather and employer’s risks etc. Establishing causation in respect of the various contract provisions is essential.
Additionally, all contractor claims must be supported by contemporaneous project records and documentation which create the cause-effect link.
For the specific case of a delay claim, the crucial element of proof needed should be based on the project schedules used to execute the work.
Too many projects are transformed from the best of intentions into highly impacted projects that are out of control and headed for claims and disputes.
Claims are most often initiated by contractors against employers due to a multitude of employer actions or inactions. Some of the typical employer actions or inactions (causes) that can create cost and schedule impacts are listed below:
A contractor must be able to demonstrate, through a cause-effect analysis, how one or many of such causes resulted in a cost or schedule impact to the contractor. In addition, it is also important to evaluate the timing of causes as well as potential impacts to the critical path, if any.
For example, in one case, a contractor was claiming late drawings by the Engineer as a reason of overall project delay.
Based on a programme analysis, it was confirmed that there was no impact on any project activity which resulted in an overall delay of the project milestones. Therefore, the contractor\'s claims were unsupported and disapproved due to lack of a cause-and-effect analysis which provided an evidence of the contractor’s contentions.
For obvious reasons, global claims are usually discouraged and difficult to substantiate. For example, multitude of causes such as, design delays, design errors, variations, poor project management decisions, late possession of site etc. Whereas a direct causal link with particular items of the losses is difficult to establish.
Similar to the rights of the contractors, the employers are also entitled to claim, from the contractors, any payment which they consider is due to them by virtue of certain defaults under or in connection with the contract. Some examples are;
The preliminary focus of the parties to any contract should be to follow the principles of claims avoidance. However, if necessary, claims should be, especially those related to an extension of time, handled by experts and not novices who end up manipulating the complexities thus resulting in front of expensive dispute resolution forums.
Both parties generally want to avoid claims, but too frequently the contract specifications and construction management practices actually work against them. The key to successful claims avoidance, once the project has been awarded, is to provide the project team with the tools they need to identify problems quickly, measure impacts reliably, and price them fairly in order to resolve changes as they arise and, thus, avoid claims.
Although many contracts are drafted with the intention to avoid claims, in reality, some contribute in creating more claims. Also, many widely used construction management approaches actually encourage claims. Both the contract and standard practices can create a claims friendly environment.
Front end tasks should be carried out to eliminate or minimize the possibility of claims and disputes arising from construction contracts and some of these include:
Execution stage of a project should utilize sound contract administration/management procedures to help a project team successfully defend/win claims and avoid disputes. Some recommendations in this respect are:
The procedure for settlement of claims specified by FIDIC is a multi-tier (or several steps) process.
The higher tiers get more and more expensive.
Thus it suits both parties to resolve disputes as early as possible.
Tier 1 – Engineer’s Determination
Tier 2 – Dispute Adjudication Board (DAB)
Tier 3 – Amicable Settlement
Where a notice of dissatisfaction has been given, both parties shall, pursuant to Sub-Clause 20.5, attempt to settle the dispute amicably before commencement of Arbitration (Tier 4).
The Amicable Settlement process should continue till 56-days after the notice of dissatisfaction was given.
Where the parties agree, amicable settlement process may be omitted. However, Arbitration (Tier 4) may only commence after 56-days after the notice of dissatisfaction was given.
Unless settled amicably, any dispute in respect of the DAB’s Decision (if any) which has not become final and binding, shall be finally settled by international arbitration (Sub-Clause 20.6).
Stipulated procedure by FIDIC, unless otherwise agreed by the parties, is to finally settle disputes under the Rules of Arbitration of the International Chamber of Commerce.
Either party who is dissatisfied with the Decision given by DAB, may commence Arbitration.
Arbitration may commence prior to or after the completion of the Works, provided that the obligations of the Employer, the Engineer and the Contractor shall not be altered by reason of the arbitration being conducted during the progress of the Works.
Generally all costs of arbitration shall initially be shared equally between the Parties, but the Arbitral Tribunal shall have the right, when making its award, to allocate such costs between the Parties as it shall so decide.
Tier 4 – Arbitration
The objective of this section is to bring to the attention of the FIDIC Drafting Committee, the experiences of the author in respect of recurring disputes on a multitude of projects. This is in no way to be implied as a criticism of the existing provisions of the 1999 version of FIDIC forms.
It is acknowledged that the existing provisions have been drafted after taking account of various factors which may not be in the knowledge of the author and the suggestions in the following slides are merely meant to assist the drafting committee in arriving at possible updates of some of the existing provisions.
The following wish list is limited to the subject of this presentation - ‘Claims’ and their respective settlement procedures.
Time-bar provisions for claim notices under Sub-Clause 20.1
Time-bar provisions for a claim notice under Sub-clause 20.1 are a condition precedent for a claim to be approved. Generally the contractors consider this provision to be punitive and in cases to be unfair.
The primary objective of time-bar on a notice is to ‘alert’ the other party such that the cause of notice may be prevented, if possible. A secondary objective is to permit the evaluation of a claim contemporaneously, such that memories are fresh and that this may actually be of help to the contractors.
Both objectives are important and should remain in place. However, a possible alternative could be an ‘early warning’ notice as defined by the NEC3 Contract forms. The objective to timely ‘alert’ remains intact without actually having punitive consequences for the contractors.
The time-bar on submission of claim particulars and on the period permitted to the Engineer for an assessment and Determination should remain unchanged as these have obvious benefits for both parties.
Conflicts of Time-bar provisions for claims under Sub-Clause 20.1
It is usually argued, in Islamic law countries, that the time-bar provisions of Sub-Clause 20.1 conflict with the Islamic law, which, in principle, does not time bar any remedies at law. Pursuant to Sub-Clause 1.4, the Islamic Law may be the governing law for a contract and may thus override Sub-Clause 20.1.
For the sake of consistency worldwide and for elimination of disputes on this matter, it is suggested to explicitly make 20.1 be the governing clause, such that this supersedes any other conflicts.
DAB discretion to override Time-bar provisions for claim notices in the FIDIC Gold Book 2008
Sub-Clause 20.1 of the Gold Book, in respect of submission period of claim notices, stipulates;
“…However, if the Contractor considers there are circumstances which justify the late submission, he may submit the details to the DAB for a ruling. If the DAB considers that, in all the circumstances, it is fair and reasonable that the late submission be accepted, the DAB shall have the authority to overrule the relevant 28 day limit …”
Evidence of a justification for late submission of claim notices, may itself be contentious and therefore it is suggested that similar discretion may be avoided in the updates of other FIDIC forms like the Red Book etc.
Replacement of the word ‘Payment’ under Sub-Clause 20.1
The word ‘payment’ under Sub-Clause 20.1 could be replaced by the word ‘Costs” as defined under Sub-Clause 184.108.40.206. This should bring clarity that additional payment claims must be based on incurred (with evidence), as opposed to theoretical costs.
EOT Particulars under Sub-Clause 20.1
Under Sub-Clause 20.1, for the case of an Extension of Time (EOT) claim, the supporting particulars should require the contractor to submit a cause-and-effect programme analysis prepared within the guidelines of industry standards like the SCL Protocol.
Extension of Time (EOT) Provisions of Sub-Clause 8.4
The most common construction claims worldwide relate to an Extension of Time (EOT).
FIDIC recognizes delay, however, the principles of how delay and related costs should be calculated are not defined by FIDIC. This leads to issues; issues which are usually contentious due to various \'schools of thoughts\' and varied interpretations existing worldwide.
If not explicitly made reference to, it is suggested that Sub-Clause 8.4 should be re-drafted to ensure this takes account of the principles set out by the Society of Construction Law’s ‘Delay and Disruption Protocol’ (SCL Protocol).
In this context, the suggested additional paragraphs at the end of Sub-Clause 8.4 could be in line with the following;
“The Engineer\'s Determination of an EOT should be assessed such that each cause is dealt independently of other causes; other causes, some of which may be the liability of the Contractor. Other causes, even if some of these are due to actions/inactions of the Contractor, should not reduce the Contractor\'s entitlement to an EOT. Actions/inactions of the Contractor having a bearing on the cause of delay under evaluation, should however be taken into account in respect of its effect on the Time for Completion of the Works.
The Contractor\'s entitlement for the recovery of additional payments, resulting from an extended Time for Completion of the Works, should be assessed taking account of all causes (whichever Party may be liable for these).”
Mandatory Appointment of a DAB
The use of dispute boards (e.g. DAB’s) in the construction industry has over many years significantly contributed to the avoidance and early resolution of disputes. The great benefit of using a standing dispute board is that its members may be called upon as soon as a problem arises and help the parties resolve their differences before they become polarized in their views.
The dispute avoidance role of a standing board should be emphasized: the DAB encourages the parties to solve their own problems, creating an atmosphere where the parties communicate and recourse to the advisory role of the dispute board. Resolving conflicts at an early stage, or even before they arise, is an obvious benefit that greatly reduces costs such as legal fees, and reduces loss of productive time and goodwill between the parties.
It is not uncommon that one of the parties will resist the appointment of a DAB. This may be to avoid the costs associated with DAB or otherwise. With the obvious benefits of a DAB (especially of a standing Board), it may be prudent to bind the parties to setup a DAB at the outset of a project. Alternatively punitive deductions (or reimbursements, as the case maybe) could be linked thereto.
This Lecture was delivered by the Managing Partner of Construction Solutions (www.cspk.org), Mr. Khalil Tayab Hasan. For any queries and clarifications, please feel free to contact Mr. Hasan at;